Why Budget Testing is a terrible way for foundations to determine funding allocation


spiral-1081904_960_720A while ago, I wrote “When you don’t disclose salary range on a job posting, a unicorn loses its wings.” The post highlights the importance of salary transparency from the beginning of the hiring process. It also talks about one of the dumbest and most damaging hiring practices we have: Using salary history to determine the starting pay of new hires. This practice ensures that people who have been underpaid—primarily women and people of color—continue to be underpaid. We, the sector fighting for equity and social justice, must end this archaic and destructive practice immediately.

As I’ve been thinking more about how we treat individuals in the sector, I’ve been noticing that there is a parallel to how we treat organizations and even whole communities. A parallel to using salary history at the organizational level is something I’m going to call “Budget Testing.” This is when funders have rules regarding how much funding an organization can apply for based on its budget size. Many foundations, for example, will not fund an organization for more than 10% of its budget. Others have set limits, such as organizations with budgets less than $1M can only apply for $25,000, and those over $1M can apply for $100,000.

Budget Testing, like salary history, is something many of us are used to, but it is time we examine its role and harmful effects in the nonprofit sector. As I wrote earlier, in Funders, your grant application process may be perpetuating inequity, “If an organization led by communities of color has a budget of 100K, and you only fund 10% of any budget, then they cannot hope to get over 10K, whereas an organization with a budget of 1 million will be able to get 100K. Applying a rigid fixed percentage means organizations and communities that most need funding will get the least funding.” 

Budget Testing allows a larger nonprofit to be able to grow, while smaller, grassroots organizations continue to struggle. Getting 10K, while great, is not nearly as helpful as getting 100K. With 100K, you can hire a full-time exempt person, an essential element in organizational growth. With 10K, you can’t do much; if you’re lucky, you may be able to Frankenstein some other sources of funding together to get a part-time person, or pay for other elements to help your program to limp along. It’s like telling a kid, “Because you’re so little, I’m going to give you a few cheerios. When you grow big and strong, I’ll give you more and better food.” The flaw with this argument is that kids cannot grow just by being fed a few cheerios every day. (Despite my 2-year-old’s insistence otherwise)

Because of Budget Testing and other factors, organizations that are led by communities of color, women, people with disabilities, rural communities, LGBTQ communities, are stuck in a downward spiral, a Catch-22, the Capacity Paradox, where they are too small to get significant funding, so they remain small and can’t get significant funding. This runs counter to one of the very basic tenets of Equity, which our sector has been touting, which is that communities that need the most resources get the most resources. We put up the iconic pictures of the kids of different heights standing on the boxes, watching the baseball game. In Equality, all the kids get a box each, but the little kid is still unable to see over the fence. In the Equity panel, the tallest kid gets nothing, and middle kid gets a box, and the short kid gets two boxes, and everyone can see the game. The shortest kid gets TWICE the resource as the other kids.

All of us are familiar with this image. Budget testing, in complete contrast, is like saying “The maximum funding you can apply for is 10% of your height. So if you are 80 inches tall, you get a box that is 8 inches. If you are 40 inches tall, you get a box that is 4 inches.” This is not a good way to determine funding allocation. In fact, it just perpetuates inequity, leaving behind marginalized communities. Under that sort of rule, the short kid will never be able to see the baseball game.

We use Budget Testing because it is simple and easy to understand. Budgets are universal; every organization, no matter what they do or where they are, has one. It makes foundations seem objective to have a rule based on budget size. But if our sector really wants to fully realize our value of Equity, we must throw long-held rules and practices out the window. Otherwise, we need to stop complaining about the lack of organizations led by marginalized communities having capacity to do stuff, about the lack of diversity in the sector, about the lack of engagement among disenfranchised communities, about the ineffectiveness of status quo interventions, about the lack of innovation. Here are some of my recommendations for foundations:

Calculate how much fund you provide in total to organizations led by marginalized communities: If your value is Equity and social justice, but only a small portion of your funds go to organizations led by communities of color and other marginalized communities, then something is not right. This is not to say that bigger, mainstream organizations are bad. They do awesome stuff and have important roles to play, but we cannot address injustice effectively unless the people most affected by it are leading the efforts to tackle it.

Stop trying to protect organizations from themselves: This whole argument of “Well, if we fund too much of an org’s budget, it’s dangerous for their sustainability” is false, damaging, and patronizing. It’s like saying, “If we give this short kid two boxes, he might lose his balance and fall off and injure himself before he can actually see the game.” What’s detrimental to organizations’ long-term success is being forced to constantly Frankenstein funds together because no funder wants to pay more than 10% of an org’s budget. If funders are willing to fund 50% or 75% of an organization’s budget, especially in its early years, when its budget is relatively small, it allows it to spend less time fundraising and focus more time on building a strong program and infrastructure, which will increase its chances to survive and do its work. Funders’ concerns for organizations’ long-term success is ironically one of the biggest barriers toward organizations’ achieving long-term success.

Fund based on what an organization needs: Most organizations are formed to respond to critical community needs. If you believe in their work and want to help them do it, then fund them based on what they need to do their work well. An organization that has a budget of $100,000 and has only a part-time ED, but does amazing work, may need $35,000 to turn the part-time ED position into full-time. Yup, that’s 35% of their budget (or 26%, depending on your calculation), a number that might freak out some foundations. But so what? If they have a solid plan and do a good job and you trust them, then 35K will allow them to do their work effectively. That should be the only thing that matters.  

Replace Budget Testing with Equity Testing: Instead of using budget sizes to determine funding amount, how about using factors such as whether an organization serves primarily marginalized communities? Or if it’s responding to urgent emerging needs, such as serving refugees fleeing war and persecution? Or if it has over 50% of its board comprising people of color? If we want to achieve Equity, then let’s make Equity the center of decision making. It does not make sense to have inequitable practices and hope they will lead to Equity.

Take bigger risks: We as a sector need to stop being so risk-averse. We cannot fight injustice by hovering around a base of safety and predictability. I’ve said before that if you give two boxes to a short kid who has never stood on two boxes, he might not be used to it so might lose his balance and fall off. When that happens, the reaction from funders and others in power tend to be, “See?! I knew we shouldn’t have given that kid two boxes!” This is why organizations led by communities-of-color and other marginalized communities continue to get tiny fractions of funding that are not significant enough to break them out of the Capacity Paradox. If we are truly trying to achieve Equity, we must understand and accept that failure is part of it. If we don’t embrace risk and the occasional failure, we will never reach Equity. If the short kid falls off the boxes, help him get back up.

I work with many amazing grassroots organizations led by incredible leaders who struggle daily to keep their organizations afloat. They are mired in the same trap: because they are small, they continue to get small funding, which keeps them small. And yet they keep getting asked for their time and input and participation because they are best connected to the communities. It’s exhausting and frustrating and has been leading to a lot of day-drinking.

Our nonprofit sector, above any other sector, blazes a trail for a just and equitable world. But we cannot reach that unless we reexamine and abandon many of the harmful practices that undermine our work. Most of these practices, such as the medieval usage of salary history to determine pay, were not born out of a deliberate intent to perpetuate inequity. Budget Testing, like salary history, is a practice that unintentionally further marginalizes individuals and communities who are already disproportionately affected by injustice. It’s time we rethink this and other funding practices, because Equity requires us to take risks and do things differently. Let me know your thoughts.

If you like this post, you may like “Why Equality is actively harmful to Equity.” And before you say something like “That’s why everyone should abandon grants and focus on individual donors,” read “Why individual donation strategies often do not work for communities of color.” 

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